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Jim Rickards

The Chinese communist party has only mimicked a free market. They thought they could finess and control it, but markets have a mind of their own.

Now the empire will strike back, and they have an enormous arsenal of tools they can use to try to fight this bubble.

In the end all bubbles burst, and Jim suspects it will go down 70 or 80% before it runs its course.

Bubbles never go down in a straight line. They go down sharply, then they go up and then down again, people say to buy the dips, they go up, then they go down again. They can grind out like that.

Look at the Great Depression.

That bubble burst in 1929 but it didn’t hit bottom until 1933 — down 80%.

So this could take multiple years and there could be rallies in the meantime.

CHINA’S ARSENAL

China could cut interest rates, they could cut the reserve requirements, cheapen the yuan or sell their reserves and use that to prop up markets. There are a lot of things they can do, but this is just going to grind lower.

The US didn’t raise interest rates in 2010 when they should have, but China still has room to cut rates, and they have $3.5 trillion dollars of reserves — that’s a lot of dry powder.

But this has implications. If they sell their reserves to raise money to bail out the markets then what are they selling?

They’re selling US treasuries.

That puts upwards pressure on US interest rates. In the long run it’s just going to make the US dollar stronger and make deflation worse.

Everything that’s going on in China basically started with the Federal Reserve (Fed). The Fed’s been on what Jim calls a Kamakaze Mission.

They’ve been talking about raising interest rates all year. The US economy has been visibly slowing and deflation has had the upper hand, so why on earth has Janet Yellen been talking about raising rates?

As long as the Chinese yuan was pegged to the US dollar then US deflation was China’s deflation. That was killing China. They broke the peg but their markets are crashing.

All these things are connected.

It’s not that China caused the US problems. The problems actually started in the US, went to China, and now they’re coming back to the US.

CHINA’S STOCK MARKET

(97% of China’s stocks were suspended from trading on Monday.)

The Chinese market went down 8.5% with almost no trading, so imagine what it would have done if the trading had been free and not manipulated.

We use the word “markets” but there are no markets left in the world. (There’s always a government manipulating the market.)

The last time the US market moved to fundamentals was in March 2009.

The Chinese government is cutting rates, cheapening their curency, printing money and propping up markets — it sounds like the United States.

From the Cariboo Gold Rush Trail

It’s a bit windy coming in from China, but if you watch the patterns you’ll see the waves are coming in from all directions now.

When it’s hard to tell what’s going to happen on a day’s hike you bring a sweater in case of cold. It’s the same with the economy. We see deflation where values are lost and cash buys bargains, but we see QE all over the world which will bring inflation. So there’s a tension between the two where the talk is of crashes and exposure and the whens and wherebys it will flip from one to the other.

We need protection in case the waves get crazy. J.P. Morgan said in 1906 that only gold is money and everything else is credit. Credit is a promise. Promises are good when there’s trust but right now… well there’s not so much trust. A few explosions but not so much trust.

We buy insurance but we don’t expect insurance to make us money, se just don’t want to lose if something out of our control happens.

If it all swings quickly from deflation to inflation then many people will lose. Those with power and connections have already set themselves up and bought hard assets, but the middle class usually loses in a crash, just as the middle class in China are losing right now.

Physical gold is insurance. It’s a whole lot of other things too, and beautiful to hold.

A lot of people don’t have a “portfolio” — they have a chequing account and they hope there’s something left before the next pay cheque.

Move beyond that. Mentally move beyond that. If you buy yourself a piece of physical gold, a tiny piece, or even silver, then you now have a portfolio. You are now building wealth.

Tonight I’ll be playing in Lilloett at a house jam. Leonard Cohen’s “Hallelujah” has been requested so that’s on the set list. I’m looking forward to playing live shows again. Perhaps Main Street in Vancouver this fall. I’m counting up the things I’m thankful for right now and I ran out of fingers and toes. Time to go and practice scales and modes.

I’m learning Jim Croce’s “Time in a Bottle”. I’m also writing on alarming things and deciding how alarming to sound. Probably going to speak metaphorically, so those who listen will hear what I really mean, but maybe not bore those who don’t. That’s what “Last Swan Dive” is about. ;)

All my tools have arrived now.

My equipment is being set up this week and my new studio will absorb my time and thought. Very excited. I’ve built a million things in my mind and now my hands will work on what I’ve seen.

We hear of explosions all over the world. China, Russia, the U.S., Japan. They may be accidents or not. They may affect us or not. Governments and non-governments have been researching weapons technology for a long time. There’s no surprise there. North Vietnam’s subs have taken a tour somewhere. It’s time to watch macro events but it’s always time to watch the micro events of our own lives and to keep balanced and prepared.

We watch the economic climate swing, and we look back and forward… and pack a golden sweater in case of inclement weather.